DirectFX Weekly Market Overview

Analysis - By Sam Coxhead of http://www.directfx.co.nz

Throughout last week the market continued its dual focus of the complex debt issues in Europe, and a lower global growth outlook. The European debt situation remains tense as news emerged over the weekend that Greece will most probably miss deficit targets in 2011. The ECB, EU and IMF "Troika" are back in Athens to make their assessments on whether or not to release the next 8 billion Euro in bailout funds. This news will not be greatly received by the markets. The prospect of the increased deficit means the chances of default have increased and the pressure on the wider European banking sector again increases. To put this in context, the cost of insuring European debt is fast approaching levels seen at the peak of the global financial crisis in 2008. This increased risk premium is being felt across the globe in funding markets. It will have the wider implication of curbing growth through increased funding costs. An illustration of this is the double downgrade of New Zealand sovereign credit rating by agencies Fitch and S&P. So overall risk aversion remains in place, commodity and equity prices are again being pushed lower, and demand for US dollars and US Treasury debt remains high.

In New Zealand there was little in the way of top tier economic data last week. The NBNZ Business Confidence survey softened, but this was to be expected given the recent gloomy outlook for the global economy. Undoubtedly the biggest news came in the form of the credit rating downgrades for NZ sovereign debt. This saw the NZ dollar lose across the board as one would expect. The material impact of these downgrades will not be too significant in the short term. The fact that interbank lending rates did not materially change immediately is an encouraging sign, for the time being at least. The coming week is again light on economic data, with just the quarterly release of business opinion from the NZ Institute of Economic Research due on Tuesday.

There was little news of note in Australia last week. Most of the lead for the Australian dollar was provided by external forces. Mixed economic news from the closely aligned Chinese economy did not provide clarity, but the weakening basket of global commodities ensured that any attempt at resurgence by the Australian dollar was short lived for the most part. This week sees a more active economic calendar. Tuesday sees the release of the last building and trade balance statistics ahead of the Reserve Bank of Australia (RBA) announcement on monetary policy. The RBA are widely tipped to leave the cash rate unchanged at 4.75%. But given the crumbling global outlook and increased uncertainty, expect some kind of change to their rhetoric, which has remained stoic on inflationary pressure, much to the contrary of interest rate market pricing. Friday sees the monthly release of the retail sales numbers. These will be watched, but expect limited reaction to this number.

In the US some economic data last week was positive. Better than expected housing and weekly jobless claims, coupled with upward revisions to GDP and consumer sentiment surveys, meant the picture was relatively rosy, even if the equity markets did not reflect this. There is certainly a lessening argument for further quantitative easing (QE - basically the electronic printing of money in an attempt to stimulate growth) from the Federal Reserve (FED), and this fact is being reflected in the continuing strength of the US dollar. This week sees the usual slurry of economic data releases in the US. Tuesday sees manufacturing PMI numbers released. Wednesday FED Chairman Bernanke testifies to the Joint Economic Committee in Washington on the state of the economy. Wednesday sees non-manufacturing PMI numbers released ahead of the all important unemployment numbers on Thursday. The market expects the unemployment rate to remain at 9.1% with 51,000 jobs being created.

In Europe focus remains intense on the debt situation. Complicating matters was the release of the initial inflation number for the Euro-zone on Friday. It came out at 3.0% and decreases the chances of a 50 pt cut in the cash rate from the European Central Bank (ECB), when they announce their monetary policy on Thursday. Certainly a 25 pt cut to the cash rate is a foregone conclusion, but the economy would benefit from a further 25 pts immediately. The issue comes with the ECB's sole mandate for price stability, even if the inflationary pressure is likely to fall back in the coming months. Apart from the build up to the ECB, much of the attention will be on Athens and any further headlines that emerge from the Troika meetings. Further bank capitalization is urgently needed in Europe ahead of any managed default on bonds by Greece. It will take time to arrange the vehicle for bank recapitalization and this is why it is so importantly that this next tranche of bailout funds be extended to Greece.

In the UK there was very little in the way of economic data last week. Statements from various members of the Bank of England's (BOE) monetary policy committee seem to confirm that further QE would be embarked upon in the coming months. This week's BOE monetary policy announcement may prove to be too soon, but the chance of an extension to the 200 billion GBP program is a possibility on Thursday. Before this we have a host of manufacturing, housing and construction numbers, along with the final GDP release. The market expects around 75 billion further in efforts over the next couple of meetings to be announced and around a further 150 billion in total. This has already been priced into the GBP for the most part, so the actual announcement is not expected to greatly soften the beleaguered Pound Sterling further.

In Canada the economic data flow last week was also light. Just monthly GDP numbers on Friday revealed expected growth of +.3%. Overall the Canadian dollar has been under pressure as the commodity markets have faulted with the global growth outlook. This week sees Friday as the focus. Building, manufacturing and employment numbers are released progressively throughout the day. The better than expected US economic data last week has seen the CAD put renewed pressure on the NZ and Australian dollars.

Sam Coxhead

Global Currency Payments & Transfers

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